Low-Volatility ETF Might Be Ready to Shine

The Invesco S&P 500 Low Volatility ETF (SPLV A) is one of the dominant names in this category. Year-to-date, SPLV is offering modest out-performance relative to the S&P 500, and the low-volatility ETF could be a relevant near-term consideration for market participants for multiple reasons, including the recent ascent of the CBOE VIX Index.

“Markets have been shaken by a few different things: ongoing worries about new coronavirus variants, political instability in Eastern Europe, the sudden resurgence of inflation, and fears that rising interest rates could put a damper on future equity valuations. As a result, the VIX has recently spiked into the high 20s, compared with a long-term average of about 19.3,” writes Morningstar analyst Amy Arnott.

The $9.39 billion SPLV tracks the S&P 500 Low Volatility Index. That benchmark is comprised of the 100 S&P 500 members with the lowest trailing 12-month volatility. SPLV is currently home to 101 stocks. The fund’s methodology could prove relevant over the near- to medium-term because actual volatility — different from the aforementioned CBOE VIX Index — is trending upward, too.

“Actual volatility has also increased. After an unusually quiet year during most of 2021, the standard deviation for the Morningstar U.S. Market Index has also started trending higher. The standard deviation stood at 13.2% for the trailing 12-month period through Jan. 31, 2022, compared with 10.77% for calendar 2021,” adds Arnott.

Much of SPLV’s low-volatility prescription is written by sector attribution. While the fund is sector agnostic, some sectors are consistently less volatile than others, often leading to the largest weights being in consumer staples and utilities stocks. Those groups combine for 42% of SPLV’s roster, with the 21.72% weight to staples names being potentially advantageous against the backdrop of high inflation.

SPLV is pertinent today for another reason: Low-volatility ETFs typically decline less than traditional peers when the broader market falters.

“This volatility has also translated into more frequent losses. Since the market started getting more jittery in November 2021, about half of all trading days have closed with market losses. The number of trading days with losses of 1% or more has also increased slightly,” concludes Arnott.

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